Solicitors lose claim over losses caused by tax mitigation schemes

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Tax: schemes did not achieve their goals

Partners at a leading personal injury law firm have lost a professional negligence action against the accountants who recommended they sign up to two ultimately unsuccessful tax mitigation schemes.

They succeeded at every stage of their claim only to fall at the last when HHJ Moulder – sitting as a High Court judge – ruled that they brought the action out of time.

Halsall & Ors v Champion Consulting Ltd & Ors (Rev 1) [2017] EWHC 1079 (QB) was brought by Michael Halsall, David McDermott, Paul Stanton and the executor of the late Bernard Higgins, who at the relevant time were all partners of Merseyside firm Michael W Halsall. Mr Halsall and Mr McDermott still are.

The claims were against four defendants, all part of Champion group, an accountancy firm in Manchester that offers various services.

The claimants alleged that they were negligently induced to invest in two tax schemes.

They said one, dubbed the charity shell scheme, was promoted to them on the basis that they could obtain tax relief through the mechanism of gift aid.

It involved the investors initially subscribing for shares in a shell company with a further subscription in the event that the shell was floated. The shell company then acquired a target company and the shares of the shell company would be listed on AIM or the Channel Islands Stock Exchange.

The investor would decide whether to gift all or part of his shares to a charity and would claim tax relief on the value of the shares gifted. The amount of tax relief claimed would be on the basis of the value of the shares at the time of gift, which in turn was claimed on the basis of the value on listing.

The claimants alleged that in addition to giving the assurances, the defendants failed to advise that the valuation of the shell upon flotation was critical and there was a significant risk that the value of the shell post-flotation would be successfully challenged by HMRC.

The second, called the Scion film scheme, was an investment scheme that saw the solicitors trade in the purchase and sale of film rights in a way that was meant to deliver sideways loss relief.

The 71-page judgment focused mainly on the charity shell scheme. HHJ Moulder found that Champion breached its duty to the claimants, and that the breaches caused the unspecified losses except in the case of Mr McDermott, who was only introduced to the scheme, rather than advised on it, by Champion.

However, the action was brought in 2015, which the judge found failed for reasons for limitation. It was not brought within six years of the date when the cause of action accrued – the point at which the planning started – nor within three years when the claimants were provided with information which “would reasonably cause the claimants to start asking questions about the advice they had been given”.

They did not need to know they might have a claim for damages but the judge said that by 2011 at the latest had enough to justify setting about investigating the possibility that the advice was defective.

HHJ Moulder made a similar finding in relation the film schemes.

During the case, the defendants argued that the solicitors would have participated in the charity shells even without the assurances they had received, claiming the firm had cash-flow problems in the wake of the referral fee ban being lifted in 2004.

However, the judge said the evidence did not support this – the firm was said to be making £6m a year, while at the time Mr Halsall was worth in the region of £30m and could “lay his hands” on a few hundred thousand pounds if needed.